U.S. patent application number 12/917622 was filed with the patent office on 2011-02-24 for special maturity asr recalculated timing.
This patent application is currently assigned to JPMorgan Chase Bank, N.A.. Invention is credited to Santosh Nabar, James ROTHSCHILD, David Seaman.
Application Number | 20110047066 12/917622 |
Document ID | / |
Family ID | 43016032 |
Filed Date | 2011-02-24 |
United States Patent
Application |
20110047066 |
Kind Code |
A1 |
ROTHSCHILD; James ; et
al. |
February 24, 2011 |
SPECIAL MATURITY ASR RECALCULATED TIMING
Abstract
An system for and method of repurchasing stock is presented. The
system and method improve upon prior art techniques by limiting
risk to an investment bank that enables an accelerated stock
repurchase. More particularly, such risk is reduced in the event
that the repurchasing company announces higher than expected
dividends on the stock during the term of the accelerated
repurchase transaction.
Inventors: |
ROTHSCHILD; James; (New
York, NY) ; Nabar; Santosh; (Englewood, NJ) ;
Seaman; David; (Short Hills, NJ) |
Correspondence
Address: |
HUNTON & WILLIAMS LLP;INTELLECTUAL PROPERTY DEPARTMENT
1900 K STREET, N.W., SUITE 1200
WASHINGTON
DC
20006-1109
US
|
Assignee: |
JPMorgan Chase Bank, N.A.
New York
NY
|
Family ID: |
43016032 |
Appl. No.: |
12/917622 |
Filed: |
November 2, 2010 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
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11935076 |
Nov 5, 2007 |
7827096 |
|
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12917622 |
|
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60856294 |
Nov 3, 2006 |
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Current U.S.
Class: |
705/37 |
Current CPC
Class: |
G06Q 40/04 20130101;
G06Q 40/00 20130101 |
Class at
Publication: |
705/37 |
International
Class: |
G06Q 40/00 20060101
G06Q040/00 |
Claims
1. A method of providing a company with a large quantity of stock
shares issued by the company by borrowing the large quantity of
shares from a lender and gradually repurchasing small quantities of
the shares from the market in order to settle with the lender, the
method comprising: receiving, from the company, a request for a
first quantity of shares issued by the company; communicating, to
the company, at least one dividend limit associated with the
shares; communicating, to the company, floor amount, the floor
amount being subject to change upon the at least one dividend limit
associated with the shares being exceeded; receiving, from the
company, compensation associated with a second quantity of shares
issued by the company; borrowing, from at least one lender, a
second quantity of shares; conveying the second quantity of shares
to the company; purchasing a plurality of quantities of the shares
at market value; detecting that a sum of one or more ordinary
dividends associated with the shares and declared by the company
exceeds the at least one dividend limit; computing, using a
computer, a value of an outstanding transaction with the company,
the outstanding transaction comprising a potential revised floor
amount; adjusting, as a consequence of said detecting and based on
said computing, the floor amount; calculating a settlement number
of shares as a difference between (1) a number of shares
corresponding to the compensation and the floor amount and (2) the
second quantity of shares; compensating the company if the
settlement number of shares is negative; receiving compensation
from the company if the settlement number is positive; and settling
with the at least one lender.
2. The method of claim 1 wherein the first quantity equals the
second quantity.
3. The method of claim 1 wherein the number of shares corresponding
to the compensation and the floor amount comprises the compensation
divided by the floor amount.
4. A method of providing a company with a large quantity of stock
shares issued by the company by borrowing the large quantity of
shares from a lender and gradually repurchasing small quantities of
the shares from the market in order to settle with the lender, the
method comprising: receiving, from the company, a request for a
first quantity of shares issued by the company; communicating, to
the company, a maturity window consisting of a start maturity date
and an end maturity date, the maturity window being subject to
change upon a first dividend limit associated with the shares being
exceeded; communicating, to the company, floor amount, the floor
amount being subject to change upon a second dividend limit
associated with the shares being exceeded; receiving, from the
company, compensation associated with a second quantity of shares
issued by the company; borrowing, from at least one lender, the
second quantity of shares issued by the company; conveying the
second quantity of shares to the company; purchasing a plurality of
quantities of the shares at market value; detecting that one or
more ordinary dividends associated with the shares and declared by
the company exceeds the at least one dividend limit; computing,
using a computer, a value of an outstanding transaction with the
company, the outstanding transaction comprising one or both of a
potential revised maturity date and a potential revised floor
amount; setting, as a consequence of said detecting and based on
the computing, a revised maturity date outside of the maturity
window; adjusting, as a consequence of said detecting and based on
the computing, the floor amount; determining, as an effective share
value, the greater of the floor amount and an average share value,
wherein the average share value is determined over a time period
associated with the revised maturity date; calculating a settlement
number of shares as a difference between (1) a number of shares
corresponding to the compensation and the effective share value and
(2) the second quantity of shares; compensating the company if the
settlement number of shares is negative; receiving compensation
from the company if the settlement number is positive; and settling
with the at least one lender.
5. The method of claim 4 wherein the first quantity equals the
second quantity.
6. The method of claim 4 wherein the average share value comprises
a volume weighted average price of the shares as determined over a
time period concluding on the revised maturity date.
7. The method of claim 4 wherein the average share value is
discounted.
8. The method of claim 4 wherein the number of shares corresponding
to the compensation and the effective share value comprises the
compensation divided by the effective share value.
Description
RELATED APPLICATION
[0001] The present application claims priority to U.S. Provisional
Application No. 60/856,294 entitled "Special Maturity ASR
Recalculated Timing" to Rothschild et al., filed Nov. 3, 2006, the
contents of which are incorporated by reference herein in their
entirety.
FIELD OF THE INVENTION
[0002] The present invention generally relates to a system for and
method of equity repurchase from the marketplace. More
particularly, the present invention generally relates to a system
for and method of stock repurchase with reduced risk to the
investment bank should the repurchasing party increase its cash
dividend during the term of the repurchase agreement.
BACKGROUND OF THE INVENTION
[0003] Entities, such as corporations, that issue equity
instruments, such as stock, occasionally wish to repurchase shares
from the marketplace. However, purchasing a large number of shares
from the market generally tends to drive the price of the shares
up. Thus, a problem arises when a corporation wishes to repurchase
a large number of shares from the market, in that the price of the
shares increases as the corporation purchases additional large
batches of shares. A solution to the problem is for the
repurchasing corporation to work with another entity, typically an
investment bank ("repurchasing investment bank"), who is able to
quickly obtain a large number of shares by borrowing them from
other investment banks ("lender investment banks"). This type of
borrowing generally does not drive the share price up. The
repurchasing investment bank then sells the shares for cash to the
corporation that issued them. Over time, the repurchasing
investment bank purchases small batches of shares from the market
and conveys them to the lender investment banks in order to settle
the loans. Purchasing small batches of shares over time generally
avoids the problem of driving share prices up. The repurchasing
investment bank typically benefits from the arrangement by charging
the corporation fees.
BRIEF DESCRIPTION OF THE FIGURES
[0004] FIG. 1 is a flowchart illustrating an embodiment of the
present invention.
[0005] FIG. 2 is a flowchart illustrating an embodiment of the
present invention.
DETAILED DESCRIPTION OF CERTAIN EMBODIMENTS OF THE INVENTION
[0006] The following description is intended to convey an
understanding of the present invention by providing specific
embodiments and details. It is understood, however, that the
present invention is not limited to these specific embodiments and
details, which are exemplary only. It is further understood that
one possessing ordinary skill in the art, in light of known systems
and methods, would appreciate the use of the invention for its
intended purposes and benefits in any number of alternative
embodiments, depending upon specific design and other needs.
[0007] A traditional "fixed-cash" accelerated stock repurchase
agreement ("ASR") allows a corporation to purchase a large block of
shares without having to pay a premium to the market that is
typically associated with purchasing large blocks of stock. A
typical transaction may be structured as follows. On day one, the
corporation pays an investment bank ("repurchasing investment
bank") for a large block of stock. In return, the repurchasing
investment bank supplies the corporation with the block of stock.
The repurchasing investment bank typically obtains the block of
stock by borrowing the shares from one or more investment banks
("lender investment banks"). For example, on day one, the
corporation pays $100 million to the repurchasing investment bank
and receives one million shares. (This example assumes, by way of
non-limiting example, that the corporation wishes to repurchase one
million shares, and that the market price for a single share is
$100 on day one.) The entire transaction is set to last one hundred
days. Each day (e.g., day n), the repurchasing investment bank
purchases shares from the market using an amount of cash equal to,
by way of non-limiting example, RCA.sub.n/DR, where "RCA.sub.n"
denotes the Remaining Cash Amount on day n, and "DR" denotes the
number of days remaining in the transaction. The RCA.sub.n for any
day after day one may be calculated as, by way of non-limiting
example, RCA.sub.n=RCA.sub.n-1.times.(1+R)-C, where "RCA.sub.n-1"
denotes the Remaining Cash Amount on the previous day (n-1), "R"
denotes the interest rate, and "C" denotes the amount of cash spent
that day purchasing shares (e.g., RCA.sub.n/DR). That is, the
Remaining Cash Amount on any given day after day one may be
calculated as the previous day's Remaining Cash Amount plus
interest on that amount minus the cash spent on purchasing shares
that day. At maturity (in this example, day one hundred) the
Remaining Cash Amount is equal to zero. If, over the course of the
transaction, the repurchasing investment bank has repurchased more
than one million shares, it conveys the surplus to the corporation.
If the repurchasing investment bank has purchased less than one
million shares, then the corporation will deliver the difference to
the repurchasing investment bank. The repurchasing investment bank
the settles with the lender investment banks during the course of
the transaction. That is, as it acquires shares, the repurchasing
investment bank transfers them to the lender investment banks.
[0008] A discount ASR is an alternative to the traditional
fixed-cash ASR. This program is similar to a fixed-cash ASR, except
that the repurchasing investment bank may select a maturity date at
any time during (i.e., within) a specified time period. The
following is a non-limiting example. On day one, the corporation
pays $100 million to the repurchasing investment bank and receives
one million shares (assuming, again by way of non-limiting example,
that the corporation wishes to repurchase one million shares, and
that the market price for a single share is $100 on day one). The
repurchasing investment bank borrows the shares from one or more
lender investment banks. The maturity date is initially set at nine
months from day one. However, the repurchasing investment bank has
the right to re-set the maturity date to at any date between six
and nine months from day one.
[0009] Once the (original or accelerated) maturity date has been
reached, a Final Share Number ("FSN") is determined as, by way of
non-limiting example, $100 million divided by the following
quantity: the average SEC Rule 10b-18 volume-weighted average price
("VWAP") from inception to maturity minus $0.50. The $0.50 in the
previous sentence represents a discount to the VWAP. Other discount
amounts are also contemplated, such as, by way of non-limiting
example, $0.01, $0.05, $0.10, and any $0.01 increment up to and
past $100.00. Continuing this example, if the FSN is greater than
one million shares, the repurchasing investment bank delivers the
excess to the corporation. If the FSN is less than the original one
million shares, the corporation delivers the difference to the
repurchasing investment bank (in shares or cash). The repurchasing
investment bank returns the borrowed shares, which the repurchasing
investment bank purchases at market value to the lender investment
banks during the course of the transaction.
[0010] The repurchasing investment bank is able to provide a
guaranteed discount to the VWAP because: (1) the repurchasing
investment bank is guaranteed a return on cash for the first six
months after inception (e.g., by investing the $100 million and any
remainder after stock repurchases), and (2) the repurchasing
investment bank has an option to extend the maturity for up to an
additional three months. This value of this option can be locked in
by the repurchasing investment bank's traders. Corporations that
care more about purchasing shares below VWAP and less about how
long it takes to complete the program are ideal candidates for the
discount ASR.
[0011] The repurchasing investment bank typically hedges the ASR or
discount ASR by borrowing shares at inception and delivering them
to the corporation. During the term, as the repurchasing investment
bank buys more shares, it delivers them to the stock lenders (e.g.,
the lender investment banks) to close out the repurchasing
investment bank's short position. If the corporation pays a
dividend during the term of the accelerated buyback or discount
ASR, the repurchasing investment bank will owe the dividend to
stock lenders (e.g., the lending investment banks) on the number of
shares the repurchasing investment bank is short at that time. As a
result, the original economic terms of the deal typically reflect
the amount of dividends that are expected to be paid during its
term. Once the contract is in place, however, the repurchasing
investment bank remains exposed to risk if the corporation raises
its dividend versus the original expected level. Repurchase
agreements have dealt with this exposure in one of two ways: (1)
including a provision in the contract causing it to terminate upon
announcement of dividends above a specified level per share, or (2)
having the client pay through any increases of their dividends to
the investment bank. Solution (1) is sub-optimal because clients
often do not want to terminate their buyback programs prematurely.
Further, solution (1) may cause a company to withhold dividends
that it might otherwise declare, a situation that is unfavorable
both to the company's investors and to market perceptions of the
company. Solution (2) is sub-optimal because it would give rise to
disadvantaged treatment under U.S. accounting rules, as explained
immediately below.
[0012] The Emerging Issues Task Force ("EITF") Issue 03-6 says that
issuer securities/derivatives that give the investor/counterparty
the right to participate in dividends are subject to two-class
Earnings Per Share ("EPS") treatment. Under two-class treatment,
earnings are divided among common stock and other "participating
securities" so the effect is to dilute basic EPS. In general,
diluting EPS is unfavorable for a company. Convertibles and other
derivative trades other than equity forwards with a strike
adjustment for dividend increases do not receive two-class
treatment because the adjustments are a contingent transfer of
value rather than a non-contingent one. In other words, there
should be a material possibility that when an adjustment is made,
the issuer will not ultimately get charged (e.g., a convertible
that ultimately ends up out-of-the-money). Once a security passes
this test at inception, there is no requirement to retest over
time, so when converts/derivatives later become in-the-money there
is no impact. Note that "extraordinary dividends" can be passed
through if they are deemed extraordinary by the corporation's board
of directors, so the concern is with respect to protection for
ordinary dividend increases.
[0013] Certain embodiments of the present invention allow the
repurchasing investment bank to adjust one or both of the start
date and end date of the maturity window of a discount ASR in order
to recompense itself for a dividend increase. Other embodiments
allow the repurchasing investment bank to adjust a floor value,
which acts as a constructive lower limit on the stock's value for
the purpose of calculating the FSN and settling with the company.
Examples of these embodiments are discussed in detail below in
relation to FIGS. 1 and 2.
[0014] FIG. 1 is a flowchart illustrating an embodiment of the
present invention. According to this embodiment, a discount ASR is
improved upon as follows. By way of non-limiting example, assume
the model used to price the original transaction factors in a
dividend policy of $1.00 per share per quarter paid to shareholders
(based on the best guess at inception). If announced dividends
during any quarter within the transaction are above $1.00 per
share, the repurchasing investment bank may adjust the transaction
by one or both of: (1) moving the earliest possible maturity date
up to earlier than six months from inception, and (2) moving the
final maturity date to later than nine months after inception.
Moving the possible maturity dates serves to preserve economic
value for the repurchasing investment bank. One or both of the
direction and amount of maturity date movement may be determined
after the corporation's dividend announcement.
[0015] More particularly, the embodiment of FIG. 1 creates value
for the repurchasing investment bank by increasing the window of
possible maturity dates. This value can be locked in by the
repurchasing investment bank's traders using computer-based
derivative pricing models and will offset losses due to the
dividend increase. That is, the repurchasing investment bank may
re-calculate the value of the outstanding transaction, using
standard derivative pricing models, for various permutations of
adjusted maturity dates. Based on such re-calculations, the
repurchasing investment bank may select a revised maturity date.
Although this increased optionality is valuable to the repurchasing
investment bank, the adjustment is only a contingent transfer of
value from the client's (i.e., corporation's) perspective. There is
no assurance that the corporation will be worse off relative to a
case where the adjustment is not made (the final pricing is
determined by the average stock price during a different window
period, which may be higher or lower). As a result, the embodiment
of FIG. 1 does not give rise to two-class EPS accounting and
therefore does not create disadvantaged accounting. The structure
of this embodiment is novel and unique at least because it allows
corporations to keep the transactions outstanding, while protecting
the repurchasing investment banks from dividend increases, and not
subjecting the corporation to disadvantaged accounting
treatment.
[0016] Turning specifically to FIG. 1, the method begins at step
105 when the investment bank receives an order from a company for a
large number of the company's shares. The term "large" here means
that the quantity of share is such that a purchase of such shares
on the open market incurs a significant risk of raising the market
price of the shares. The order may be unsolicited or may originate
from within a pre-existing relationship between the investment bank
and the company. The order for the quantity of shares may be in
terms of a specific quantity of shares or in the form of a specific
amount of cash (e.g., a specific dollar amount). Either way, as the
order corresponds to a large number of shares, acquiring them from
the market would likely move the price of the shares higher, a
situation that the company wishes to avoid. Accordingly, the
company and the investment bank enter into an agreement according
to an embodiment of the present invention, in this example, the
embodiment of FIG. 1.
[0017] At step 110, the parties (i.e., the company and the
repurchasing investment bank) agree on a maturity window for the
transaction. In general, the maturity window is a set of two dates,
between which the repurchasing investment bank is allowed, as a
matter of right, to select a maturity date for the transaction. The
maturity date is used, for example, in calculating an average share
price when the repurchasing investment bank settles with the
company at the end of the transaction. The length (i.e., duration)
of the maturity window may be, by way of non-limiting example, one
month, two months, three months, six months, nine months or one
year. Further, by way of non-limiting example, the maturity window
may begin after any of the following time intervals following the
start of the transaction: one month, two months, three months, six
months, nine months or one year.
[0018] At step 115, the parties agree on one or more limits on
ordinary dividends declared during the pendency of the transaction.
Typically, such limits are established by the repurchasing
investment bank. By way of non-limiting example, such a limit may
be $0.05 per share. Other limits include, by way of non-limiting
example, any one-cent increment between $0.01 up to and beyond
$100.00 per share. Multiple limits may be established, each
corresponding to a different time period. For example, from the
start of the transaction up to three months from the start of the
transaction, the limit on ordinary dividends declared by the
company may be set at zero. For the next three months, the limit on
ordinary dividends declared by the company may be set at $0.10 per
share. During the three month interval after that, the limit on
ordinary dividends declared by the company may be set at $0.15 per
share. During the next six month interval, the limit on ordinary
dividends declared by the company may be set at $0.20 per share.
The above dividend limits and intervals are exemplary only and are
not meant to limit the present invention. Other intervals, such as
monthly, every six months, or yearly may be employed, together with
like intervals or combined with dissimilar intervals. Similarly,
other dividend limit amounts are contemplated.
[0019] At step 115, the parties may also agree on a revised
maturity window. (In alternate embodiments, this step may occur
between steps 140 and 145.) The revised window may contain the
maturity window that was established at step 110. For example, if
the transaction begins on Jan. 1, 2008 and the original maturity
window set at step 110 is from Oct. 1, 2008 to Jan. 1, 2009, the
revised maturity window may be set at Jul. 1, 2008 through Apr. 1,
2009. Note that the revised maturity window may share the same
start or end date (but not both) as the original maturity window.
In the event that the company declares ordinary dividends in excess
of those set at step 115, the repurchasing investment bank is given
the opportunity to select a revised maturity date within the
revised maturity window as explained further below in reference to
steps 140 and 145.
[0020] At step 120, the company pays the repurchasing investment
bank the amount of cash determined at step 105 (assuming the
company agrees to the terms set forth in steps 105, 110 and 115).
That is, the company pays a specific dollar amount (the "purchase
price") to the repurchasing investment bank. The day on which the
company pays the purchase price may be the same day on which the
repurchasing investment bank conveys shares to the company per step
130. However, in some embodiments, steps 120 and 130 occur on
different days. Further, either of the days on which steps 120 and
130 occur may count as the inception day for the purpose of
calculating an average share value at the end of the transaction.
Other days may alternately count as the inception day for such
purpose.
[0021] At step 125, the repurchasing investment bank borrows as
many shares as it can from one or more lender investment banks, up
to the number of shares ordered. Because the shares are borrowed
rather than obtained on the open market, the market price of the
shares will generally remain unaffected by the loan.
[0022] At step 130, the repurchasing investment bank conveys a
number of shares to the company. This number of shares, the
"initial share number," may be by way of non-limiting example, the
number of shares ordered at step 105 if the order is in the form of
a share number, or the purchase price conveyed at step 105 (if the
order is in the form of a purchase price) divided by the current
market value of a share or divided by a given par value of a share.
That is, at step 130, the repurchasing investment bank conveys to
the company a number of shares corresponding to the payment
received at 120. The conveyance may be performed manually,
electronically, or via any other communication channel, such as
U.S. or private mailing companies.
[0023] In some instances, the repurchasing investment bank will
initially convey only a portion of the shares that it will
eventually convey to the company. In such instances, the
repurchasing investment bank and company may agree that the
repurchasing investment bank will convey a remaining number of
shares at a later delivery date.
[0024] Step 135 represents that the repurchasing investment bank
conducts a series of share purchases on the open market during the
duration of the transaction. This step typically occurs repeatedly
while the transaction is pending. Such a series of purchases may be
performed in accordance with fixed-cash or discount ASRs as
discussed above. When the repurchasing investment bank obtains such
shares from the market, it typically conveys them to the lender
investment banks involved in the loan referred to at step 110.
[0025] At step 140, the repurchasing investment bank determines
whether the company exceeded any dividend limits set out at step
115. This step is ongoing throughout the pendency of the
transaction. If no limits are exceeded, then the method proceeds to
step 150 and the parties settle the transaction according to the
maturity date, which the repurchasing investment bank selects from
among the dates contained within the maturity date window
determined at step 110. If, on the other hand, the repurchasing
investment bank determines that the company exceeded the dividend
limits set forth at step 115, then the repurchasing investment bank
is given the option to select a maturity date from the revised
maturity window, which may have been established at step 115 or may
be calculated after step 140. In embodiments in which the revised
maturity window is calculated after step 140, the repurchasing
investment bank may select a revised window based on a plurality of
computations, performed using one or more derivative pricing
models, in which the value of the outstanding transaction is
computed for various potential window adjustments. The parties then
settle the transaction according to the revised maturity date
selected by the repurchasing investment bank at step 150, as
described immediately below.
[0026] At step 150, the parties settle the transaction. This step
occurs on or after the maturity date, whether the maturity date is
selected from the original maturity window determined at step 110
or the revised maturity window determined on or after step 115. The
parties may settle according to the settlement procedure set forth
above in the discussions of the fixed-cash or discount ASRs. A
further settlement technique is discussed presently. The
repurchasing investment bank calculates a Settlement Number as the
difference between (1) the purchase price divided by (a) the VWAP
of the shares during the transaction from the inception date up
until the maturity date (whether original or revised) minus (b) a
discount (by way of non-limiting example, $0.50) and (2) the
initial number of shares conveyed to company at step 130. That is,
Settlement Number=[(purchase price)/(VWAP-discount)]-[initial share
number], where the VWAP is calculated relative to the trading days
that fall on and between the inception date and the maturity date.
If the Settlement Number is negative, the company conveys shares or
cash to the repurchasing investment bank corresponding to this
number. If the Settlement Number is positive, the repurchasing
investment bank conveys shares or cash corresponding to the
Settlement Number to the company. If the Settlement Number is zero,
neither party makes any conveyance to the other party.
[0027] Thus, the embodiment of FIG. 1 improves upon a discount ASR
by allowing the repurchasing investment bank to alter, upon a
trigger event, the initial window in which it may accelerate the
maturity date. The window is typically altered by one or both of
stepping forward its opening date and stepping backward its closing
date. The amounts that these dates may be altered include, by way
of non-limiting example, not more than: a day, two to five days, a
week, two to three weeks, a month, two to six months, and a year.
Trigger events typically include the corporation announcing a
dividend in excess of a dividend ceiling agreed upon at the
beginning of the transaction. The window may be altered according
to computer projections, based on derivative pricing models, of the
value of the outstanding transaction.
[0028] FIG. 2 is a flowchart illustrating an embodiment of the
present invention. At step 205, the repurchasing investment bank
receives an order for a large quantity of share in essentially the
same manner as step 105 of FIG. 1.
[0029] At step 210, the repurchasing investment bank establishes a
floor amount. This amount acts as a minimum value of a share for
the purpose of settling with the company at step 250. In the
embodiment of FIG. 2, the floor amount is initially set very small,
by way of non-limiting example, $0.01 per share. In other
embodiments, the floor amount may be set to $0.00. Yet other
amounts are also contemplated, such as the market value of a share
at the time of step 210, or the value of a share at the time of
step 210 minus a substantial discount (e.g., a discount by 10%,
25%, 50%, 75% or 90%). Usage of the floor amount is discussed in
detail below in reference to steps 240, 245 and 250.
[0030] At step 215, the repurchasing investment bank establishes
dividend limits in essentially the same manner as at step 115 of
the embodiment of FIG. 1. As in step 115, there may be one, or more
than one, dividend limit; if more than one, then each may be
associated with a different time interval. In contrast to step 115
of some embodiments of FIG. 1, in the embodiment of FIG. 2, the
parties do not establish a revised maturity window. At step 220,
the company conveys a purchase price as compensation to the
repurchasing investment bank. Similar to the embodiment of FIG. 1,
this step is occurs if the company agrees to the terms set forth at
steps 205, 210, and 215. At step 225, the repurchasing investment
bank attempts to borrow shares from lender investment banks, again
in essentially the same manner as step 110 of FIG. 1. At step 230,
the repurchasing investment bank conveys an "initial share number"
to the company, the number of shares reflecting the purchase price
as described above in relation to step 130. The inception date for
the purpose of calculating an average share value at step 250 may
be the date on which either of steps 220 or 230 occur, or may be
another date. At step 235, which repeatedly occurs during the
pendency of the transaction, the repurchasing investment bank buys
shares from the market and conveys them to the lender investment
banks, as in step 135 of FIG. 1.
[0031] At step 240, the repurchasing investment bank determines
whether the company exceeded the dividend limit(s) set out at step
215. If not, then the process proceeds to step 250, where the
parties settle the transaction as discussed below. If, on the other
hand, the repurchasing investment bank determines that the company
exceeded one or more dividend limits as set forth at step 215, then
the process branches to step 245 at which the repurchasing
investment bank adjusts the floor amount upwards. The floor amount
may be adjusted to the VWAP as calculated over a portion (e.g., the
first half or another initial segment) of the term of the
transaction. The floor amount may alternately be adjusted to the
VWAP as calculated over all or a portion of the transaction term,
plus a penalty amount. Such penalty amounts may be, by way of
non-limiting example, $0.01, $0.02, $0.05, $0.10 or any other value
between, for example, $0.01 and $100.00. Other revised floor
amounts are contemplated; essentially, the repurchasing investment
bank selects a revised floor amount such that the fair value of the
transaction to the repurchasing investment bank is preserved.
[0032] At step 250, the parties settle the transaction. First, the
repurchasing investment bank determines a "Valuation Number" as the
minimum between (1) the purchase price divided by the floor amount
(whether the original or revised floor amount) and (2) the VWAP of
the shares minus a discount (by way of non-limiting example, the
discount may be $0.50). Thus, the Valuation Number=min([(purchase
price)/(floor amount)], [(purchase price)/(VWAP-discount)]). The
VWAP is calculated relative to the inception date and the maturity
date of the transaction. The repurchasing investment bank then
calculates a Settlement Number as the difference between (1) the
Valuation Number and (2) the initial number of shares conveyed to
company at step 230. That is, Settlement Number=[Valuation
Number]-[initial share number]. If the Settlement Number is
negative, the company conveys the absolute value of that number of
shares, or cash corresponding to that number of shares, to the
repurchasing investment bank. If the Settlement Number is positive,
the repurchasing investment bank conveys shares or cash
corresponding to the Settlement Number to the company. If the
Settlement Number is zero, neither party makes any conveyance to
the other party.
[0033] Thus, the embodiment of FIG. 2 improves upon the prior art
by allowing the repurchasing investment bank to revise, upon a
trigger event, a floor amount below which the share price is
constructively determined not to fall in settling with the company
at the end of the transaction. The floor amount is initially set at
close to zero (e.g., $0.01 per share). Upon a trigger event, such
as an exceeded dividend limit, the floor amount is raised to a
level that allows the repurchasing investment bank to preserve the
fair value of the transaction to the repurchasing investment
bank.
[0034] Other embodiments of the present invention include features
of the embodiments of both FIG. 1 and FIG. 2. Such embodiments may
include establishing dividend limits per steps 115 and 215. Such
embodiments may further include establishing a revised maturity
window per step 115 and establishing a floor amount per step
210.
[0035] For example, an embodiment includes the ability for a
repurchasing investment bank to, at its discretion and upon one or
more dividend limits being exceeded, either select a revised
maturity window and settle as in the embodiment of FIG. 1, or
adjust a floor amount and settle as in the embodiment of FIG. 2.
Assuming that a dividend limit is exceeded, if the repurchasing
investment bank decides to utilize the settlement procedure of the
embodiment of FIG. 1, then settlement occurs per steps 140, 145 and
150. If the repurchasing investment bank decides to utilize the
settlement procedure of the embodiment of FIG. 2, then settlement
occurs per steps 240, 245 and 250.
[0036] Other embodiments allow the repurchasing investment bank to,
at its discretion and upon one or more dividend limits being
exceeded, both select a revised maturity window as in the
embodiment of FIG. 1 and adjust a floor amount as in the embodiment
of FIG. 2. In such embodiments, the calculation of the Valuation
Number per step 250 of FIG. 2 takes into account the VWAP of the
shares during the time from inception to the revised settlement
date, where the revised settlement date is determined according to
the embodiment of FIG. 1. Thus, for example, the parties may settle
at the end of the transaction by performing the following steps.
Assuming that the company exceeds dividend limits, the repurchasing
investment bank selects a revised maturity date from a revised
maturity window as per step 145. The repurchasing investment bank
then calculates a "Valuation Number" as the minimum between (1) the
purchase price divided by the floor amount (whether the original or
revised floor amount) and (2) the purchase price divided by a
discounted VWAP of the shares, where the VWAP is calculated
relative to the inception date and the revised settlement date. The
repurchasing investment bank then calculates a Settlement Number as
the difference between (1) the Valuation Number and (2) the initial
number of shares conveyed to company at step 230. As in the
embodiment of FIG. 2, if the Settlement Number is negative, the
company conveys the absolute value of that number of shares, or
cash corresponding to that number of shares, to the repurchasing
investment bank, and if the Settlement Number is positive, the
repurchasing investment bank conveys shares or cash corresponding
to the Settlement Number to the company. If the Settlement Number
is zero, neither party makes any conveyance to the other party.
[0037] Embodiments of the present invention may include that the
repurchasing investment bank charges a transaction fee. Such a fee
may be, by way of non-limiting example, flat or a percentage of the
purchase amount.
[0038] Embodiments of the present invention may include using
computer models to hedge the transaction. Such models may calculate
the value of the entire transaction. Other computer models may be
used to determine preferable investment positions for the cash
initially conveyed from the corporation to the repurchasing
investment bank. Yet other models may be used to determine the
price of the entire transaction once a trigger event has occurred.
This price may be used to select a revised maturity window or
maturity date. Models contemplated according to certain embodiments
of the present invention include Monte Carlo simulations, e.g., in
which the transaction is priced according to various different
combinations of derivative announcement, maturity windows and/or
maturity dates.
[0039] Embodiments of the present invention may be implemented
using hardware, firmware, software, or any combination thereof.
Standard computer hardware and/or software programming techniques
may be used. Any of the calculations described herein may be
performed by computer hardware or software. By way of non-limiting
example, computer hardware or software may perform the calculations
associated with any or a combination of the following steps: 115,
140, 145, 150, 215, 240, 245 and 205. Such computer hardware or
software may convey the results of such calculations to a user by
way of a user-readable display, or may convey the results to
further hardware or software for further processing.
[0040] Other embodiments, uses, and advantages of the invention
will be apparent to those skilled in the art from consideration of
the specification and practice of the invention disclosed herein.
The specification and drawings should be considered exemplary only,
and the scope of the invention is accordingly not intended to be
limited thereby.
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